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HMRC internal manual

Employment Related Securities Manual

From
HM Revenue & Customs
Updated
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Securities with Artificially Enhanced Value

Example: enhancement of restricted shares

  • 1 January 2005 - employee is given 100 shares in subsidiary company worth £100.
  • They are issued subject to indefinite restrictions, which reduce their value by 45%, so the restricted value at 1 January 2005 is £55.
  • On 1 May 2005 those shares are artificially enhanced in value to be worth £1,000. At this time the restricted value is therefore £550 (£1,000 – (£1,000 x 45%))
  • On 1 May 2006 there is a further artificial enhancement to £2,200. At this time the restricted value is therefore (£2,200 – (£2,200 x 45%))
  • On 1 December 2006 the restrictions are lifted.

2004/5

ITEPA03/S62 money’s worth charge on the actual (restricted) value of theshares, £55

2005/6

Chapter 3B charge on artificial enhancement – relevant period y.e. 5 April 2006

S446L(2) formula IMV – MV = £1,000 – £100 = £900 (all restrictions disregarded)

S446M adjustment is CP = 1 – OP;

OP = (UMV-AMV)/UMV = (£1,000 - £550)/£1,000 = 0.45

so 1- OP = 1 – 0.45 = 0.55

The Chapter 3B charge is adjusted: £900 x 0.55 = £495, representing value passed to the employee, the remaining 45% of the enhancement remaining locked up by the effect of the restrictions.

2006/7

Chapter 2 charge on lifting of restrictions

S428(1) formula UMV x (IUP – PCP – OP) – CE = £2,200 x (0.45 – 0 – 0) – 0 = £990

Chapter 3B charge on further artificial enhancement – relevant period y/e 5 April 2007

S446L(2) formula IMV – MV = £2,200 – £1,000 = £1,200

The shares are no longer restricted so no S446M adjustment is required (adjustment for securities subject to restrictions on the valuation date). However, part of the enhanced value has already been charged under Chapter 2. Had there been no further £1,200 enhancement the Chapter 2 gain would have been:

S428(1) formula UMV x (IUP – PCP – OP) – CE = £1,000 x (0.45 – 0 – 0) – 0 = £450

S446N adjustment is DA = TA – ARTA = £990 – £450 = £540

The Chapter 3B charge is adjusted by deducting DA: £1,200 – £540 = £660

Summary

The employee now has unrestricted shares worth £2,200 and has been charged to tax on:

  2004/5 S62 money’s worth charge £55  
         
  2005/6 Chapter 3B charge on enhancement £495  
  2006/7 Chapter 2 charge on lifting of restriction £990  
    Chapter 3B charge on enhancement £660  
  Total   £2,200  

Depending on the nature of the artificial enhancements, tax could also be due under other legislation (see ERSM60010 on multiple charges).